From Addis to Davos: International Development Finance gets Conspicuous

The theme of the 2018 World Economic Forum was, “Creating a Shared Future in a Fractured World.” Its six richest attendees each boasted an estimated net worth of $5.2 billion or more, or the same amount as the total burden of Somalia’s outstanding debt, which, amid the splendor of the event, Somali Prime Minister Hassan Ali Khayre met with IMF Managing Director Christine Lagarde to discuss clearing. In this era of extreme global inequality, it is estimated that the United Nations agenda of seventeen sustainable development goals (SDGs) known as Agenda 2030, will require 4.5 trillion dollars of investment per year to be realized, or more than twice the amount expected to be available from traditional official development assistance (ODA) alone. Due to the increasing concentration of private wealth in the global economy, discussions around development finance have focused on private sector engagement, rather than more traditional, ODA from predominantly Western donor governments and multilateral institutions.

Blended finance and the SDGs

The Blended Finance Task Force released its report Better Finance, Better World, heralding the momentum building around a new framework to shift trillions of dollars in private capital into “blended finance” mechanisms to fund international development. According to the report, blended finance offers a means “to de-risk SDG-related investments (into things like sustainable infrastructure, healthcare, education and sustainable land use) in order to attract commercial capital from private investors who would otherwise not have participated.” What does this latest example of a policy framework introduced at the glitzy Davos event mean for development?

The topic of blended finance has made its way through the discussion circuit for several years. At the international Financing for Development Conference held in Addis Ababa in 2015, the OECD showcased “blended finance” as a new way to engage private capital to leverage financing for sustainable development projects. Simultaneously, OECD member states blocked a proposal from developing, G77 countries to create an international regulatory tax body, ensuring that international tax policy remain “the domain of the powerful.” In one conservative estimate, at least $1.1 trillion in illicit funds flow out of developing countries every year. Information gleaned from data leaks such as the Paradise Papers and Panama Papers have offered some insight into the vast world of illicit capital, controlled by elites (some who are regular attendees at Davos) beyond the scope of regulation. At the 2015 financing conference, an organized civil society contingent officially responded to its outcome document, the Addis Ababa Action Agenda, citing concerns that “without a parallel recognition of the developmental role of the State and clear safeguards to its ability to regulate in the public interest, there is a great risk that the private sector undermines rather than supports sustainable development.”

An official “how-to” guide on implementing blended finance created by OECD reports “the good news… that private capital flows to emerging and frontier markets [those belonging to counties that appear on an official list of “fragile” states] are already growing: foreign direct investment (FDI) from private investors more than doubled between 2004 and 2014, from under $400 billion to over $1.1 trillion annually.” In other words, the total of private capital flowing into these markets is estimated to equal total illicit capital outflows from developing countries. It is in this context that the discussion of public-private partnerships in development finance has emphasized “de-risking” investments for the private sector, a goal reiterated in the targeting of blended finance in sub-Saharan Africa, where forty percent of all blended finance transactions have taken place as of 2017. The OECD contends that blended finance could attract “1.5 times the aggregate financing provided by all international financial institutions to ODA-eligible countries.”

The Role of the State

There is evidence to suggest that private capital injections as a vehicle for development will amplify already existing gaps in resource distribution. Research commissioned by the g7+ Foundation, which represents a group of states deemed “fragile” by the international community, has shown that prioritizing fiduciary risk over development outcomes contributes to the fragmented, project-oriented approach that is the norm in development. In cases where funds have been channeled through national systems, rather than parallel structures, development outcomes have been more broadly achieved. Despite this, Susan L. Woodward has found that from 1997-2006, only 16 percent of World Bank post-conflict development funds were disbursed through governments, and between 2004-2006, in World Bank designated “Low Income Countries Under Stress, only 25 percent of aid flowed through governments. Private sector approaches emphasizing protection of private investors would likely follow the same trajectory.

Moreover, it is estimated that one third of global aid is currently spent on technical assistance, a spending area that is prioritized in public-private partnerships, despite the fact that much of these funds directly return to the developed world as salaries. Since gaining momentum as a modality for development finance, concern has also grown that public-private partnerships undermine public health commitments by competing with other health programs and prioritizing private interests in the delivery of health services.

Davos Men as Multi-stakeholders

German economist and engineer Klaus Schwab inaugurated an annual meeting of European business leaders at the European Management Forum in 1971, which has later become known as the World Economic Forum. The annual meetings held almost immediate significance for international organizations and national governments. In 1972, the first state leader to be invited, Luxemburg President Pierre Werner, presented a plan for a single European currency and Monetary Union. Participants soon agreed to a Davos “Code of Ethics,” based on business management principles of “multi-stakeholder engagement,” a concept that takes into account the views and impacts on society at large (stakeholders and shareholders) of management decisions. As the forum grew in membership and notoriety, it expanded its purpose from “an independent, self-financing, not-for-profit Foundation, aligned with the strategic needs of the top decision-makers of European business”[1] to include the interests of business and world leaders across the globe.

Klaus Schwab has remained committed to the project of globalization in all its aspects through the decades. Between 1977-1987, the forum established a partnership with the United Nations Industrial Development Organization, received official sponsorship from the Organization for Economic Cooperation and Development (OECD), and updated its name to the World Economic Forum to reflect its growth in outreach. Discussions among trade ministers at Davos eventually led to establishment of the World Trade Organization in 1995.[2] When anti-globalization movements took shape around the world in the 1990s, Schwab connected “the rise of a new brand of populist politicians” in industrial democracies with a growing mood of “helplessness and anxiety”. Yet, eight months prior to the collapse of global markets, in January of 2008, Schwab expounded upon the “diminishing role of the nation-state,” and corresponding influence of “corporate governance, corporate philanthropy, corporate social responsibility, corporate social entrepreneurship, and corporate citizenship,” in global society.

The World Economic Forum’s multi-stakeholder approach considers the impacts of business on societies, but places onus on corporate entities to design strategies that benefit all stakeholders when “rule of law is weak and what is acceptable may not be clear.” After the 2008 crash, Schwab decried “bonuses and other systems that link the management to the short-term interest of the shareholders.”[3] For better or worse, the multi-stakeholder concept has become fundamental to international development.

As shown in Klaus Schwab’s book “Modern Enterprise Management in Mechanical Engineering”, the company is at the center, surrounded by its stakeholders.

In 2008, future Afghanistan President Ashraf Ghani and Clare Lockhart explored the menagerie of philanthropic, governmental, and international interests occupying parallel spaces throughout the developing world in their book Fixing Failed States: A Framework for Rebuilding a Fractured World. In it, they paint a picture of international bureaucrats toiling in developing country offices, “preoccupied with the latest intellectual fashions and initiatives at their faraway headquarters,” while “managing hundreds of disparate projects that can never compose an organized developmental vision.” Ghani and Lockhart refer to the material difference between the experiences of international and national staff as a “sovereignty gap,” and blame its persistence in many countries on corruption—fed by the non-disclosure of contractual arrangements for the extraction of minerals and other resources, the pooling of resource rents to offshore accounts, and impacts of frequent banking crises, while government officials lead lives of “conspicuous consumption.”

“Though living in the same country, the two bureaucracies—one international and well-funded from abroad, one national and almost always starved for funds—are conceptually (and in terms of available resources) miles apart and therefore rarely interact meaningfully.” – Ashraf Ghani and Clare Lockhart

Ghani and Lockhart refer to an annual ritual of global elites that is analogous to Davos, that of attending the annual meetings of the UNGA in New York, and meetings of the IMF and World Bank in Washington DC. These journeys represent “rituals of sovereignty,” social acts through which world leaders exercise their de jure right to participate in the international organizations of which they are constituents. Formal debates in these organizations might begin as informal discussions at the annual meeting in Davos, or its many regional meetings. The World Economic Forum, originally conceived in alignment with “with the strategic needs of the top decision-makers of European business,” has morphed into “a multi-stakeholder platform for global affairs,” and finally, into “the International Organization for Public-Private Cooperation.” As the terms of this cooperation are increasingly negotiated outside of formal structures, it is clear that in developing countries, a multitude of stakeholders will share the future.

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The Developing Economics blog takes critical approach to development economics. It seeks to stimulate debate and critical reflection on economic development among academics and practitioners from all relevant fields.